Theory

Question 1

Short Run Aggregate Supply SRAS

Answer 1

SRAS measures the way in which general price level changes as the level of GDP changes. Shifts in SRAS are caused by changes in the cost of factors of production.

Question 2

Long Run Aggregate Supply LRAS

Answer 2

LRAS measures UK full capacity output of goods and services, it’s full productive potential. A shift in LRAS occurs as a result in a change in the productive potential of the economy caused by greater investment.

Question 3

Multiplier Effect

Answer 3

As a component of AD increases (C,I,G,X) then AD increases proportionately more, meaning that an increase in a component of AD generates a movement from Y1 to Y2 and short run economic growth.

Question 4

Accelerator Effect

Answer 4

Investment is positively related to the rate of economic growth. As economic growth increases investment will grow at a greater rate.

Question 5

Short Run Economic Growth

Answer 5

The rate at which actual GDP fluctuates every year, shown as the business cycle.

Question 6

Long Run Economic Growth

Answer 6

The rate at which the productive potential grows every year.

Question 7

Output Gap

Answer 7

The difference between the actual rate of short run economic growth and the productive potential of the economy.

Question 8

Aggregate Demand

Answer 8

The total level of demand within an economy at any one moment in time. It is the total value of expenditure on UK goods and services.
AD= C+I+G+X-M